Slovakia getting slower, but still a tiger: OECD

IT MAY be slowing down, but Slovakia will still be an economic tiger of the region, said the Organisation for Economic Cooperation and Development (OECD) in its latest economic forecast.

IT MAY be slowing down, but Slovakia will still be an economic tiger of the region, said the Organisation for Economic Cooperation and Development (OECD) in its latest economic forecast.

The economic group also expects the country’s jobless rate, which is among the highest in the European Union, to drop, and encourages fiscal discipline for Slovakia in order to make it to the eurozone.

“Economic growth is projected to ease to seven percent by 2009 as the rate at which new export-oriented manufacturing capacity comes on stream declines,” the OECD said in its report.

Slovak market watchers have been thinking along the same lines as the OECD: they say economic growth will moderately slow down in the coming years, but it won’t change Slovakia’s position as an economic leader in Central Europe.

The OECD estimates that GDP growth will stand at 7.3 percent in 2008, which is almost the same figure that Slovak analysts came up with.

“We expect that the growth of the economy will slow down from nine percent to 7.4 percent in 2008 and 5.9 percent in 2009,” the chief analyst of UniCredit Bank, Viliam Pätoprstý, told The Slovak Spectator. “The effects of launching large investments in the car, electro-technical and machinery industries will be fading.”

However, this slowdown should not have a decisive impact on other areas of the economy, he said. On the contrary, falling unemployment and growing wage pressures should further stimulate private consumption, which will help economic growth in the short-term, mainly in the trade sector, Pätoprstý added.

Silvia Čechovičová, a macro-economic analyst with ČSOB Bank, also expects that the tempo of GDP growth will gradually slow down.

“While for the whole year of 2007, we expect the growth to stand at 8.9 percent, in 2008 we expect that it will slow down to 7.2 percent,” Čechovičová told The Slovak Spectator.

The main reason for the drop will be the high comparison basis from 2007, as well as the expected slowdown of economies in the EU, Slovakia’s largest trading partner, Čechovičová said.

For 2009, Čechovičová’s GDP growth estimate matches the OECD forecast of 6.9 percent. She said the growth be fuelled by both domestic demand – consumption and investments – and foreign demand.

Euro requires discipline

The OECD is encouraging Slovakia to remain disciplined in its fiscal policies, which is crucial for meeting the Maastricht criteria and softening the danger of a boom-bust cycle after the country joins the eurozone, which Slovakia wants to do in 2009.

The Finance Ministry expects that Slovakia will reach a general government deficit of 2.9 percent of the GDP this year. According to recently-approved state budget for 2008, the public deficit for next year is projected at 2.3 percent. Both figures are below the three-percent Maastricht criterion for euro adoption.

The OECD detects higher food prices, increases in indirect taxes and the expected euro changeover in 2009 as inflation-related threats. Inflation should reach 2.7 percent in 2007 and 3.2 percent in 2008, and in 2009 the growth should slow down to 2.8 percent, the OECD estimated.

As for the greatest inflation risks in the region, Pätoprstý agreed that on short-term it is mainly prices of food and fuel. In the medium-term it is the lack of labour, which can press on the faster growth of wages.

Oil and food prices are factors that the central bank cannot influence through its monetary policies, Čechovičová said.

Slovakia’s unemployment rate in 2007 was ****. The OECD estimates that unemployment will fall to 10.1 percent in 2008 and 9.4 percent in 2009.

“Labour market reforms should continue to help bring the long-term unemployed back into employment and make entry into the labour force more attractive to young women and older workers,” the OECD wrote in its outlook. “This would help spread the gains from strong growth more widely.”

Economic growth will create new jobs, which will push down unemployment, Čechovičová said.

Pätoprstý expects that the average rate of disposable unemployment – those available to take a job immediately –should be around 7.3 percent in 2009.

“The main reason for the further, but slower, decline should mainly be the growing production capacities in key industrial areas, but also the secondary development in industrialised regions,” Pätoprstý added.

However, Čechovičová also warned that the demographics of the unemployed, who are mostly long-term jobless without qualifications, and their placement on the job market is still a problem, which might prevent a more radical drop in the rate.

“The drop in long-term unemployment will be the greatest challenge of the coming years,” Čechovičová concluded.

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